ACCOUNTING FOR PARTNERSHIP FORMATION

Ways of Forming a Partnership

A partnership may be formed in any of the following ways:
1. Two or more individuals may form a partnership
a. Two or more capitalist partners
b. A capitalist partner and an industrial partner.
2. One sole Proprietor and an Individual
3. Two or more sole proprietorships.

Capital Adjustment Rules in Recording the Capital Accounts of the Partners

The following guidelines should be taken into account:
For individual partners

 All non-cash assets that are to be invested in the partnership should be recorded at
agreed value or fair market value, not at cost or book value.
For sole proprietor partners

 Only capital accounts will be used in recording any gain or loss on valuation of non-cash
assets. Capital account is used in place of income or loss account.
o Gain to the partner: Capital account is credited when the revaluation of assets
resulted in a gain to the owner.
o Loss to the partner: Capital account is debited when the revaluation of assets
resulted in a loss to the owner.
 In adjusting the value of the Accounts Receivable account, use the contra-asset account
“Allowance for doubtful account and NOT “Accounts Receivable” account.
 In adjusting the value of depreciable assets, use the contra-asset account “Accumulated
Depreciation” and NOT the specific fixed asset account.
For Partnership Between Two or More Individuals
When partners to a newly formed trading firm invest for the first time, the opening entry will
simply be to debit the assets contributed and to credit the capital accounts of each of the
contributing partners. If one of the partners is an industrial partner, then a memorandum entry
is made in the general journal and noted in the general ledger.
PRACTICE ILLUSTRATIONS:
1. TWO INDIVIDUAL PARTNERS
a. Both are capitalist partners
On September 1, 2009, Rody and Lorie formed a partnership with cash contributions
of P300,000 and P200,000, respectively. In addition to Rody’s cash contribution, he
also contributed an office equipment costing P10,000 but with an agreed valuation of
P7,500. Lorie on the other hand contributed a piece of land costing P100,000 but with
an agreed valuation of P150,000. The land was mortgaged in a bank for P50,000, and
it was agreed the partnership would absorb the mortgage liability in the bank.

b. Both are capitalist partners who contributed cash and non-cash assets
Aga and Hap agreed to form a partnership with a profit and loss ratio of 50/50. On May 1, Aga
contributed cash – P200,000, office equipment with a fair market value of P20,000 and a
second hand delivery vehicle bought last year for P50,000 but with present fair market value
of P30,000. On May 2, Hap contributed cash – P36,000, merchandise bought 3 months ago
for P200,000 but with present fair market value of P210,000 and an antique furniture which
cost P5,000, an accumulated depreciation of P3,000 and a fair market value of P4,000.
 2. PARTNERSHIP BETWEEN A SOLE PROPRIETORSHIP AND AN INDIVIDUAL
Allan Ta has been in business for quite sometime as a sole proprietor. He is in need of working capital
to undertake business expansion, so he decided to invite his friend, Berta Hwa, to join him in the new
partnership. The new partnership will be called “Ta-Hwa Comedy Bar and Restaurant” and will assume
the assets and liabilities of Allan Ta’s business.

On January 2, 2014, Berta Hwa accepted the offer and will invest cash equivalent to 40% of the capital
of Allan after the revaluation of his assets. Both agreed to revalue the assets of Allan’s business as
follows:

Revalued at
Accounts Receivable P 40,000
Restaurant Inventory 45,000
Office Equipment 25,000
Land 100,000
Building 120,000

The financial position of Allan’s business at the time of the formation f the partnership with Berta is shown
below: